The Capabilities of Market-Driven Organizations

Author(s): George S. Day

Reviewed work(s):
Source: Journal of Marketing, Vol. 58, No. 4 (Oct., 1994), pp. 37-52
Published by: American Marketing Association
Stable URL: http://www.jstor.org/stable/1251915 .
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 GeorgeS. Day

The of Market-Drive
Capabilities
Organizations
Considerable progress has been made in identifying market-driven businesses, understanding what they do, and
measuring the bottom-line consequences of their orientation to their markets. The next challenge is to understand
how this organizational orientation can be achieved and sustained. The emerging capabilities approach to strate-
gic management, when coupled with total quality management, offers a rich array of ways to design change pro-
grams that will enhance a market orientation. The most distinctive features of market-driven organizations are their
mastery of the market sensing and customer linking capabilities. A comprehensive change program aimed at en-
hancing these capabilities includes: (1) the diagnosis of current capabilities, (2) anticipation of future needs for ca-
pabilities, (3) bottom-up redesign of underlying processes, (4) top-down direction and commitment, (5) creative use
of information technology, and (6) continuous monitoring of progress.

The marketingconcept has been a paradoxin the field of
management.For over 40 years managershave been ex-
hortedto "stay close to the customer,""putthe customerat
the top of the organizationalchart,"and define the purpose
of a business as the creation and retentionof satisfied cus-
tomers.1Companies that are better equipped to respond to
marketrequirementsand anticipatechanging conditions are
expected to enjoy long-runcompetitiveadvantageand supe-
rior profitability.
Throughoutmuch of its history,however,the marketing
concept has been more an article of faith than a practical
basis for managinga business.2Little was known about the
defining featuresor attributesof this organizationalorienta-
tion, and evidence as to the antecedents and performance
consequences was mainly anecdotal. Consequently, man-
agers had little guidanceon how to improveor redirecttheir
organizations'externalorientationtowardtheir markets.
lThe earliest proponent of the marketing concept was Peter Drucker
(1954), who argued that creating a satisfied customer was the only valid
definition of business purpose. Subsequentauthorsdescribed the concept
and its benefits, e.g., McKittrick(1957), Felton (1959), Barksdaleand Dar-
den (1971), Kotler (1977), Peters and Waterman(1982), Shapiro (1988b)
and Webster(1992). These authorsdo not make careful distinctionsamong
customer oriented, marketoriented, and marketdriven; they lean toward
marketdrivento describethe orientationof a firm thatstays close to its cus-
tomers and ahead of its competitors-thus making competitive superiority
an explicit element of the concept.
2This state of affairsmay explain why the marketingconcept has had lit-
tle influence on other managementfields. Thus, a review of "all variables
that have been proposed seriously as indices of organizationaleffective-
ness" (Campbell 1977) failed to mention customer satisfaction. Similarly,
the notion of a marketorientationis nowhereto be found in a discussion of
competingprinciplesof managementpresumedto be causally relatedto the
effectiveness of organizations(Lewin and Minton 1986). During this peri-
od, however, discussions of organizational culture gave considerable
weight to an "externalversus internalemphasis"as an influentialaspect of
a culture(Reynolds 1986).
GeorgeS. Dayis theGeoffreyT.BoisiProfessor
of Marketing
andDirec-
torof theHuntsman CenterforGlobalCompetition
andInnovation,
The
Wharton of Pennsylvania.
School,University
Fortunately,this situation is changing following a "re-
discovery"in the late 1980s (Dickson 1992; Webster1988).
In the last five years, a numberof conceptual and empirical
studies have appeared that more clearly describe what a
marketorientationis and what it consists of. According to
this emerging literature,marketorientationrepresentssupe-
rior skills in understandingand satisfying customers (Day
1990). Its principalfeaturesare the following:
*A set of beliefs that puts the customer'sinterestfirst
(Deshpand6, Farley,andWebster1993),
*Theabilityof the organization to generate,disseminate,
anduse superiorinformation aboutcustomersandcom-
petitors (Kohli and Jaworski 1990), and
*Thecoordinated applicationof interfunctional
resources
to the creationof superiorcustomervalue(Narverand
Slater1990;Shapiro1988b).
In addition, a modest but growing body of empirical evi-
dence supportsthe proposition that a marketorientationis
positively associated with superior performance (Desh-
pande, Farley,and Webster 1993; Jaworskiand Kohli 1992;
Narverand Slater 1990; Ruekert 1992).
Despite the recent progress in understandingwhat a
market-drivenorganizationdoes and identifying who they
are, troubling gaps and shortcomings remain. Little is
known, for example, about the characteristicsof successful
programsfor building marketorientation.How should these
programsbe designed? Should managementemphasize fun-
damentalculturechange, revised work processes, organiza-
tional restructuring,new systems, redirectedincentives, or
some other set of plausible initiatives? Interestingly,many
of these implementationissues have been addressedby par-
allel work on total quality management (TQM). Like the
marketing concept, TQM promises superior performance
through an external focus on customer satisfaction and an
internal focus on operationalexcellence. The difference is
thatTQM offers managersa host of organizationalprescrip-
tions and supportingtools.

Journal of Marketing
Vol. 58 (October 1994), 37-52 Market-Driven
Organizations/ 37

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 I addressthese issues by examining the role of capabili-
ties in creating a market-orientedorganization.Capabilities
are complex bundles of skills and collective learning,exer-
cised throughorganizationalprocesses, that ensure superior
coordinationof functional activities. I propose that organi-
zations can become more marketorientedby identifyingand
building the special capabilitiesthat set market-drivenorga-
nizations apart.The discussion is divided into three parts.
First, I define capabilitiesin more detail and explore the re-
lationship between a firm's capabilities and its strategy.
Next, I argue that market-drivenorganizationsare superior
in their market-sensing and customer-linkingcapabilities.
When these two capabilitiesare deeply embeddedwithin the
organization,all functionalactivities and organizationalpro-
cesses will be better directed toward anticipating and re-
sponding to changing market requirementsahead of com-
petitors. Finally, I derive some lessons on how to apply the
capabilities approachto the design of programsto enhance
a marketorientation.
The Capabilities Approach
to Strategy
Two Perspectives on Competitiveness
How does a business achieve and maintaina superiorcom-
petitive position? This question is at the heartof the strate-
gy development process and largely defines the field of
strategic management.One answer given by the emerging
capabilities or resource-based theories cites two related
sources of advantage:Assets are the resource endowments
the business has accumulated(e.g., investmentsin the scale,
scope, and efficiency of facilities and systems, brandequity,
and the consequences of the location of activities for factor
costs and governmentsupport);and capabilities are the glue
that brings these assets together and enables them to be de-
ployed advantageously.Capabilities differ from assets in
that they cannot be given a monetaryvalue, as can tangible
plant and equipment,and are so deeply embeddedin the or-
ganizationalroutines and practicesthat they cannot be trad-
ed or imitated(Dierkx and Cool 1989).
The competitive forces approach(Porter 1980) and the
related entry deterrenceapproach(Ghemawat1990), which
have been the dominant paradigms in the strategy field
(Teece, Pisano, and Shuen 1991), have a differentanswer to
the questionof how superiorperformanceis achieved.These
approachesput the emphasis on the intensityof competition
in the industryand marketsegment thatdeterminesthe prof-
it potential.The firm seeks a position in an attractivemarket
that it can defend against competitors. Although manage-
ment's task is then to identify and develop the requisiteca-
pabilities, what really mattersis achieving a defensible cost
or differentiationposition in an attractivemarketand keep-
ing their rivals off balance through strategic investments,
pricing strategies,and signals.
The capabilities approach, by contrast, locates the
sources of a defensible competitive position in the distinc-
tive, hard-to-duplicateresources the firm has developed
(Itami 1987; Rumelt, Schendel, and Teece 1991). These re-
38 1Journalof Marketing,October1994
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sources, which are made up of integratedcombinationsof
assets and capabilities, are cultivatedslowly over time and
limit the ability of the firm to adapt to change. Manage-
ment's task is to determinehow best to improveand exploit
these firm-specificresources (Mahoney and Pandian 1992),
althoughin times of turbulencethe challenge of developing
new capabilitiescomes to the fore (Barney 1991;Wererfelt
1984).
Defining and Identifying Capabilities
The concept of capabilities is not new. An emphasis on
building distinctive capabilities or competencies can be
found in Selznick (1957) and Penrose (1959) and is featured
in the strengths and weaknesses component of the early
business policy frameworks(Learnedet al. 1969). Although
these early frameworksprovideuseful insights, the lack of a
thorough theoretical understandingof capabilities meant
that in practice firms did little more than compile lengthy
and indiscriminatelists of strengthsand weaknesses.
As noted previously,capabilitiesare complex bundlesof
skills and accumulatedknowledge, exercised throughorga-
nizationalprocesses, that enable firms to coordinateactivi-
ties and make use of their assets.3Capabilitiesare manifest-
ed in such typical business activities as order fulfillment,
new product development, and service delivery. One well-
known capabilityis Wal-Mart'scross-dockinglogistics sys-
tem (Stalk, Evans, and Shulman 1992). It is partof a broad-
er "customerpull" system that startswith individual stores
placing their orders on the basis of store-movementdata.
These orders are gathered and filled by suppliers in full
truckloads. The loads are delivered to Wal-Mart's ware-
houses, where they are sorted, repacked,and dispatchedto
stores. The transferfrom one loading dock to anothertakes
less than 48 hours, sharplycutting the usual inventoryand
handlingcosts.
Capabilitiesand organizationalprocesses are closely en-
twined, because it is the capabilitythatenables the activities
in a business process to be carried out. The business will
have as manyprocesses as are necessaryto carryout the nat-
ural business activities defined by the stage in the value
chain and the key success factors in the market.Thus, the
necessary business processes of a life insurance company
will be differentfrom the processes found in a microproces-
sor fabricator.Each of the processes has a beginningand end
state that facilitates identificationand implies all the work
that gets done in between. Thus, new productdevelopment
proceeds from concept screening to marketlaunch, and the
order fulfillment process extends from the receipt of the
orderto payment.
Because capabilities are deeply embedded within the
fabric of the organization,they can be hardfor the manage-
ment to identify. One way to overcome this problem is to
createdetailedmaps of the sets of process activitiesin which
3Distinctionsare frequently made between competencies, well-defined
routines that are combined with firm-specific assets to enable distinctive
functions to be carriedout, and capabilities, the mechanismsand process-
es by which new competencies are developed (Teece, Pisano, and Shuen
1991). This implies that competencies are largely static, which seems a re-
strictiveandunnecessarycondition.Thus, for our purposesthe termsarees-
sentially interchangeable.
the capabilitiesare employed (Hammerand Champy 1993).
These maps usually show thatcapabilitiesand theirdefining
processes span several functions and several organizational
levels and involve extensive communications.
Capabilitiesare furtherobscuredbecause much of their
knowledge component is tacit and dispersed. This knowl-
edge is distributed along four separate dimensions
(Leonard-Barton1992): First are the accumulatedemployee
knowledge and skills that come from technical knowledge,
training,and long experience with the process. The second
dimension is the knowledge embeddedin technical systems,
comprising the informationin linked databases,the formal
proceduresand established"routines"for dealing with given
problems or transactions(Nelson and Winter 1982), and the
computersystems themselves. Thirdand fourthare the man-
agement systems and the values and norms that define the
content and interpretationof the knowledge, transcendindi-
vidual capabilities, and unify these capabilitiesinto a cohe-
sive whole. The managementsystems representthe formal
and informal ways of creating and controlling knowledge.
The values and norms that dictate what informationis to be
collected, what types are most important,who gets access to
the information,how it is to be used, and so forth are a part
of the overall culture.4
Distinctive Capabilities
Every business acquires many capabilities that enable it to
carry out the activities necessary to move its products or
services through the value chain. Some will be done ade-
quately,otherspoorly,but a few must be superiorif the busi-
ness is to outperformthe competition.These are the distinc-
tive capabilities that supporta marketposition that is valu-
able and difficult to match.They must be managedwith spe-
cial care throughthe focused commitmentof resources, as-
signmentof dedicatedpeople, and continuedefforts to learn,
supportedby dramaticgoals for improvement.
The most defensible test of the distinctivenessof a capa-
bility is whether it makes a disproportionatecontributionto
the provision of superiorcustomer value-as defined from
the customer's perspective-or permits the business to de-
liver value to customers in an appreciablymore cost-effec-
tive way. In this respect a distinctive capability functions
like a key success factor. Clearly, for example, Honda's
prowess with fuel-efficient, reliable, and responsive small
displacement engines and drive trains adds a great deal of
value and sets their cars apartfrom the competition. Other
examples are Motorola's masteryof continuousquality im-
provementand rapid productdevelopmentand Federal Ex-
press's ability to manage integratedtransactionprocessing
systems.
Customers are unlikely to be aware of or interestedin
the underlyingprocesses that yield the superiorvalue they
receive. Thus, one of the critical managementtasks is to de-
cide which capabilities to emphasize, which is dictated by
4This role of culture is consistent with the organizational cognition
paradigm from which the competing values model of culture is derived
(Quinn 1988; Quinn and McGrath;Smircich 1983). This model has been
successfully adaptedto the study of culturesof market-drivenorganizations
by Deshpande,Farley,and Webster(1988).
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how they choose to compete. Considerhow MarriottHotels
is able to consistently receive the best ratingsfrom business
travelers and meeting planners for high-quality service.
They are certainlyas capable as Hyatt, Hilton, and others at
selecting good sites, opening new hotels smoothly,and mar-
keting them well (Irvin and Michaels 1989). What consis-
tently sets them apartand reveals a distinctiveservice capa-
bility (actually a set of linked capabilities each performed
outstandinglywell) is a "fanaticaleye for detail."This be-
gins with a hiring process that systematically recruits,
screens, and selects from as many as 40 applicantsfor each
position andcontinuesthroughevery hotel operation;for ex-
ample, maids follow a 66-point guide to making up bed-
rooms. The effective managementof these linked processes,
within an organizationalculture that values thoroughness
and customerresponsiveness,creates a distinctive capabili-
ty that gives Marriottemployees clear guidance on how to
take the initiativeto provide excellent customerservice.
Another test asks whetherthe capability can be readily
matchedby rivals. Because distinctivecapabilitiesare diffi-
cult to develop, they resist imitation.KMartknows full well
what Wal-Marthas accomplished with its logistics system
and can readily buy the hardwareand software, but it has
been unable to match the underlyingcapability.First, Wal-
Mart'scapabilityis embeddedin a complex process thathar-
monizes an arrayof skills and knowledge and involves con-
siderable learning over many years. Second, Wal-Mart's
processes are not readilyvisible because they cut across dif-
ferent organizationalunits. Third,because much of the col-
lective knowledge that makes up the coordinationskills is
tacit and dispersed among many individuals, a competitor
could not acquirethe requisiteknowledge simply by staffing
with the best availablepeople (Bartmessand Cery 1993).
Another attributeof distinctive capabilities is that they
are robust and can be used in different ways to speed the
firm's adaptionto environmentalchange (Boynton and Vic-
tor 1991; Prahaladand Hamel 1990). Honda, for example,
has been able to apply its companywide mastery of engine
and drive train technology developmentand manufacturing
processes to create distinctivecapabilitiesin a varietyof re-
lated marketslike generators,outboardmarineengines, and
lawn mowers.It is less clear whetherHonda'sdistinctiveca-
pability in dealer management(Stalk, Evans, and Shulman
1992), which was used to develop a networkof betterman-
aged and financed motorcycle dealers than the part-time
dealersof competitors,also aided its entryinto new markets.
On the one hand,Honda'sskill at managingdealershas been
of value in the auto market, where Honda dealers consis-
tently receive high ratings for customer satisfaction. It is
harderto say whether the logic of Honda's diversification
into relatedmarketswas really guided by a desire to exploit
this dealer managementcapability. More likely it was the
ability to gain a multipliereffect by integratingboth distinc-
tive capabilitiesthat shaped the moves into new markets.
The capabilities of a corporationthat span and support
multiple lines of business, such as those that Honda has de-
ployed, arecommonly called core competencies.Each of the
separate business units draws on these corporatewidere-
sources to quickly and effectively develop some or all of the
distinctivecapabilitiesit needs to attaina superiorcompeti-
Market-Driven
Organizations/ 39
 FIGURE 1
Sources of Competitive Advantage and Superior Performance

9 I

I PerformanceOutcomes A~~
I?
I
I
PositionsofAdvantage|
j

DISTINCTIVE CAPABILITIES
* Based on superiority
in process
x
management integration of
knowledge x of
diffusion learning C??

??r

I ???
????,
-
I

Capabilities of the - Core Competencies of

BusinessAssetBusiness Bu- the Corporation
* Scale, scope, and * Skillsandaccumulated * Spanandsupport
efficiency knowledge multiplelinesof business
* Financialcondition * Enablethe activitiesin a
* Brandequity businessprocessto be
* Location carriedout

tive position in its served markets.These core competencies Thus, a directconnectionexists between the masteryof dis-
are also different from both business and corporateassets tinctive capabilitiesand superiorprofitability.
(see Figure 1).

Capabilities and Performance Capabilities in Market-Driven

The strategicimportanceof capabilitieslies in theirdemon-
strable contributionto sustainable competitive advantages
and superiorprofitability.A sizeable literaturehas recently
emerged to explain how capabilities serve as a source of
competitive advantageand also accounts for the durability
of these advantages (Amit and Schoemaker 1993; Peteraf
1993). The durabilityof capabilities-basedadvantagesstems
from (1) their scarcity, (2) their relative immobility, either
because they cannot be traded or are much more valuable
where they are currentlyemployed than they would be else-
where, and (3) the difficulty that competitorsface in under-
standingand imitatingthem (Reed and De Fillippi 1990).
What if a business has no distinctive capabilities? In
other words, it is no more proficientwith any of its essential
processes than the average of its rivals and is unable to dis-
tinguish itself favorablyalong any dimensions that are im-
portantto its target customers. If the industryis at a stale-
mate and none of its rivalshas a meaningfuladvantage,then
the profits of the business will settle at the level of the in-
dustry average (Porter 1980). In the more likely event that
different competitors have mastered different capabilities
and can offer higher quality, more responsive service, or
more innovativeproducts,then a paritybusiness has no re-
course but to lower its prices to offset the lack of benefits.
Organizations
Classifying Capabilities
It is not possible to enumerateall possible capabilities,be-
cause every business develops its own configurationof ca-
pabilities that is rooted in the realities of its competitive
market, past commitments, and anticipated requirements.
Nonetheless, certaintypes of capabilitiescan be recognized
in all businesses, correspondingto the core processes for
creatingeconomic value.
Some capabilitiesare easier to identify than others,usu-
ally because their activities are containedwithin the organi-
zation. Thus, Pitney-Bowes's ability to solve customers'
mail-handling problems and McDonald's Corporation's
achievementof unparalleledconsistency of service delivery
in dispersedoutlets are pointed to as distinctivecapabilities
that explain their durable advantages. The visibility and
prevalenceof these examples of capabilitiesthat have been
successfully deployed from the inside out have led some ob-
servers to argue that firms should be defined by what they
are capable of doing, ratherthan by the needs they seek to
satisfy (Grant 1991). This perspective is unbalanced, be-
cause it is the ability of the business to use these inside-out
capabilities to exploit external possibilities that matters.

40/ Journalof Marketing,October1994

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 FIGURE2
ClassifyingCapabilities

EXTERNAL INTERNAL
EMPHASIS EMPHASIS
Ii -1o
0
I I

Outside-In Inside-Out
imp- _q*
Processes Processes

-4* Spanning Processes 01-

* MarketSensing * Customer Order Fulfilment * Financial Management

* Customer Linking * Pricing * Cost Control
* Channel Bonding * Purchasing * Technology Development
* Technology Monitoring * Customer Service Delivery * Integrated Logistics
* New Product/Service * Manufacturing/Transformation
Development Processes
* Strategy Development * Human Resources Management
* EnvironmentHealth and Safety

Thus, there has to be a matching "outside-in"capability to
sense these possibilities and decide how best to serve them.
Consider the Coming, Inc. division that manufactures
fiber optic products. Its challenge was to balance demands
for increased product customization and faster delivery
while reducing costs to stay ahead of aggressive competi-
tion. Originally, its objective was to be the most efficient
mass producer of standardfiber optics. As the fiber optic
marketevolved and customers began to demand more spe-
cialized products,it was necessary to convert the manufac-
turing capabilities from a rigid, standard-production system
to a flexible manufacturingplatform capable of building
customized fiber productsto order.This transitionrequired
both an inside-out capability to produce the low-cost, cus-
tom productson a timely basis and an outside-in capability
for understandingthe evolving requirementsof customers
and energizing the organizationto respondto them.
Capabilitiescan be usefully sorted into three categories,
depending on the orientationand focus of the defining pro-
cesses (see Figure 2). At one end of the spectrumare those
that are deployed from the inside out and activatedby mar-
ket requirements,competitive challenges, and external op-
portunities.Examples are manufacturingand other transfor-
mation activities, logistics, and human resource manage-
ment, includingrecruiting,training,and motivatingemploy-
ees. At the other end of the spectrumare those capabilities
whose focal point is almost exclusively outside the organi-
zation. The purposeof these outside-in capabilitiesis to con-
nect the processes that define the other organizationalcapa-
bilities to the external environmentand enable the business
to compete by anticipating market requirementsahead of
competitors and creating durable relationships with cus-
tomers, channel members, and suppliers.Finally, spanning
capabilities are needed to integrate the inside-out and out-
side-in capabilities.Strategydevelopment,new product/ser-
vice development, price setting, purchasing,and customer
orderfulfillmentare criticalactivities that must be informed
by both external (outside-in) and internal (inside-out)
analyses.
Market-drivenorganizationshave superiormarketsens-
ing, customerlinking, and channelbondingcapabilities.The
processes underlyingtheir superiorcapabilitiesare well un-
derstood and effectively managed and deliver superior in-
sights that inform and guide both spanning and inside-out
capabilities.The effect is to shift the span of all processes
furthertowardthe externalend of the orientationdimension.
Considerwhat happenswhen humanresourcesare managed
by the belief thatcustomersatisfactionis both a cause and a
consequence of employee satisfaction.Key policies become
market oriented: Rewards are based on measurable im-
provementsin customer satisfactionand retention,employ-
ees are empowered to resolve customer problems without
approvals,recruitingis based on customerproblem-solving
skills, and so forth. By contrast,the spanningand inside-out
capabilitiesof internallyorientedfirms will be poorly guid-
ed by marketconsiderations,which confines them to a nar-
row band towardthe internalend of the orientationdimen-
sion. One reason is that the necessary outside-in processes
that comprise the market sensing, customer linking, and

Market-Driven
Organizations/ 41

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 FIGURE 3
Order Fulfillment Process: Basis of a Critical Spanning Capability

>*MarketSensing
Outside-InProcesses * CustomerLinking
a \ * ChannelBonding
4

v II
IL IL lb

Order >rder Entry\ O Billing Post

Order Or
Gen- X And
y e Order and Sales
Planning/ eration /rioritization/Schedulin/ Fulfilment Payment Service
I
,,
ffs
0~~~~~~~~~~~~~

Cost Estimation
and Pricing

I% ILI * Manufacturing/
Transformation
Inside-OutProcesses
* FinancialManagement
_____________/~~~~
* IntegratedLogistics

channel bonding capabilities are likely to be poorly under-
stood, badly managed,or deficient.5
The Role of Spanning Capabilities
Spanning capabilities are exercised through the sequences
of activities that comprise the processes used to satisfy the
anticipatedneeds of customers identified by the outside-in
capabilitiesand meet the commitmentsthathave been made
to enhance relationships.Orderfulfillment,new productde-
velopment, and service delivery processes all play this role.
Managing these horizontal processes so they become dis-
tinctive capabilitiesthatcompetitorscannotreadilymatchis
very different from managing a vertical function in a tradi-
tional hierarchicalorganization.
First, process management emphasizes external objec-
tives. These objectives may involve customers' satisfaction
with the outcome of the process, whether quality, delivery
time, or installationassistance, or may be based on compet-
itive performancebenchmarks(e.g., cycle time, order pro-
cessing time). This helps ensure that all those involved with
the process are focused on providing superiorvalue to ex-
ternal or internal customers. These objectives become the
basis for a measurementand control system that monitors
progress towardthe objective.
5Thedifferencebetween market-drivenand internallyorientedorganiza-
tions that we describe here is similar to the notion of organizationalintru-
siveness proposed by Daft and Weick (1984). They contrastorganizations
that actively searchthe environmentfor answerswith passive organizations
that accept whatever informationthe environmentgives them, do not en-
gage in trial and error learning, and interpretthe environmentwithin ac-
cepted terms.
Second, in coordinatingthe activities of a complex pro-
cess, severaljurisdictionalboundariesmust be crossed and
horizontalconnections made. These interactionsrequirean
identifiableowner of the process who can isolate sources of
delay and take action to eliminate them. When no one un-
derstandsthe total flow of activities in an order-entrypro-
cess, for example, critical time-consuming steps such as
credit checks may be undertakenseparately in sequence
when they could have been done in parallelto save time.
Third,informationis readily availableto all team mem-
bers, unfilteredby a hierarchy.If a question arises concern-
ing orderrequirements,delivery status,or partsavailability,
everyone who is affected by the answer can get the infor-
mation directly without having to go through an
intermediary.
The orderfulfillmentprocess in Figure 3 illustratesboth
the problems and benefits of managing a process so it be-
comes a distinctive capabilityratherthan simply a sequen-
tial series of necessary activities. Often this process is ob-
scuredfrom top managementview because it links activities
that take place routinelyas sales forecasts are made, orders
are received and scheduled, productsare shipped, and ser-
vices are provided (Shapiro, Rangan, and Sviokla 1992).
Things can go awry if unrealisticpromises are made to cus-
tomers,these promises are not kept, blame is passed around,
and inventoriesexpand as each function seeks to protectit-
self from the shortcomingsof another (in part because no
one incurs a cost for holding excess inventories).
Furthermore,the order fulfillment process has a wealth
of connections to other processes. It brings together infor-

42 / Journalof Marketing,October1994

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 FIGURE4
MarketSensing: Processes for Learning About Markets
V_____________
Inquiry
Initiated 'Information Information Inter- ntr\ \ Evaluation
I)nformation) of
or /Acquisition/ Distribution pretation/ Utilization/Outcomes
/ Continued/
I a
A
*
t %
I II ---
OrganizationMemory
mation from the outside-in processes and depends on their
ability to forecast and generatea flow of orders.It depends
even more on the inside-out manufacturingand logistics
processes to fulfill the scheduled ordersor have capacity in
place to service requests and transactions.Finally, there is
the allied process of cost estimation and pricing of orders.
The managementof this activity will significantly improve
profitability,if the customer value of each order is clearly
recognized and the costs of filling each orderare known.
MarketSensing as a DistinctiveCapability
Every discussion of marketorientationemphasizes the abil-
ity of the firm to learn about customers, competitors, and
channel members in orderto continuously sense and act on
events and trends in present and prospective markets. In
market-drivenfirms the processes for gathering, interpret-
ing, and using market information are more systematic,
thoughtful,and anticipatorythan in other firms. They readi-
ly surpassthe ad hoc, reactive,constrained,and diffused ef-
forts of their internallyfocused rivals.
A behavioral definition of a marketorientationas "the
organization-wide generation of market intelligence, dis-
seminationof its intelligence across departments,and orga-
nization-wide responsiveness to it" (Kohli and Jaworski
1990, p. 6), capturesthe essence of a marketsensing capa-
bility. Each element of this definitiondescribesa distinctac-
tivity having to do with collecting and acting on information
aboutcustomerneeds and the influence of technology,com-
petition, and other environmentalforces. Narver and Slater
(1990) offer anotherdefinition in the same spirit.They dis-
tinguish three behavioral components: customer orienta-
tion-the firm's understandingof the target market;com-
petitor orientation-the firm's understandingof the long-
run capabilitiesof present and prospectivecompetitors;and
interfunctionalcoordination-the coordinatedutilizationof
company resourcesto create superiorcustomervalue.
An alternativeto this behavioralperspectiveholds that a
marketorientationis part of a more deeply rooted and per-
vasive culture. For this purpose, Deshpande and Webster
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Further
)
Inquiry
a
Augmentationof Memory
(1989, p. 3), following Davis (1984), define cultureas "the
patternof sharedvalues and beliefs that gives the members
of an organization meaning, and provides them with the
rules for behavior."A market-drivenculture supports the
value of thoroughmarketintelligence and the necessity of
functionallycoordinatedactions directedat gaining a com-
petitive advantage.An absence of these shared beliefs and
values would surely compromisethe activity patternsadvo-
cated by the behavioralperspective.
The process of market sensing follows the usual se-
quence of informationprocessing activities that organiza-
tions use to learn (Day 1994; Fioles and Lyles 1985; Huber
1991; Levitt and March 1988; Sinkula 1994). The stylized
sequence in Figure4 can be initiatedby a forthcomingdeci-
sion or an emerging problem, such as explaining why per-
formance is declining. In addition, established procedures
for collecting secondary information may prompt further
market-sensingactivity.This step leads to the active acqui-
sition and distributionof informationaboutthe needs andre-
sponses of the market,how it is segmented, how relation-
ships are sustained,the intentions and capabilities of com-
petitors, and the evolving role of channel partners.Before
this informationcan be acted on, it has to be interpreted
througha process of sorting, classification, and simplifica-
tion to reveal coherentpatterns.This interpretationis facili-
tatedby the mental models of managers,6which contain de-
cision rules for filtering informationand useful heuristics
for deciding how to act on the informationin light of antic-
ipated outcomes. Furtherlearning comes from observing
and evaluatingthe resultsof the decisions takenon the basis
of the priorinformation.Did the marketrespondas expect-
ed, and if not, why not? Organizationalmemory plays sev-
6A growing body of literaturesuggests persuasivelythat it is the struc-
ture and content of these simplified cognitive portrayalsof environments
(mental models) that actually drives strategic decisions (see, e.g., Pfeffer
and Salancik 1978; Porac and Thomas 1990; Weick 1979). Day and Ne-
dungadi(1994) show thatthe mentalmodels used by managersto represent
their competitive advantageare a sensible adaptationto their environment
and stronglyinfluence the patternof informationusage.
Market-Driven / 43
Organizations
eral roles in this process: It serves as a repositoryfor collec-
tive insights containedwithin policies, procedures,routines,
and rules that can be retrievedwhen needed; a source of an-
swers to ongoing inquiries;and a major determinantof the
ability to ask appropriatequestions.
Market-drivenfirms are distinguished by an ability to
sense events and trendsin their marketsaheadof their com-
petitors. They can anticipatemore accuratelythe responses
to actions designed to retain or attractcustomers, improve
channel relations,or thwartcompetitors.They can act on in-
formationin a timely, coherentmannerbecause the assump-
tions about the marketare broadly shared.This anticipatory
capabilityis based on superiorityin each step of the process.
It is achieved through opened-minded inquiry, synergistic
informationdistribution,mutually informedinterpretations,
and accessible memories.
Open-mindedinquiry. All organizations acquire infor-
mation about trends, events, opportunities, and threats in
their market environment through scanning, direct experi-
ence, imitation,or problem-solvinginquiries.Market-driven
organizationsapproachthese activities in a more thoughtful
and systematic fashion, in the belief that all decisions start
with the market.The most distinctive features of their ap-
proach to inquiryare the following:
*Activescanning-All organizations trackkeymarketcon-
ditionsandactivitiesandtryto learnfromthedepartures
fromwhatis normalandexpected.However,thislearning
is usuallya top-downeffortbecauseinformationfromthe
frontlineemployeesis blocked.In market-driven organi-
zations,thesefrontlinecontacts,who hearcomplaintsor
requestsfor new servicesand see the consequencesof
competitiveactivity,aremotivatedto informmanagement
systematically.
*Self-criticalbenchmarking-Most firms do regulartear-
downanalysesof competitors' productsandoccasionally
studyfirmsforinsightsintohowto performdiscretefunc-
tionsandactivitiesbetter.Market-driven
firmsstudyatti-
tudes,values,andmanagement processesof nonpareils.
*Continuousexperimentationand improvement-All orga-
nizationstinkerwith theirproceduresandpracticesand
take actionsaimedat improvingproductivityand cus-
tomersatisfaction.However,most are not very serious
about systematicallyplanningand observingthe out-
comes of theseongoingchanges,so thosethatimprove
performance areadoptedandothersaredropped.
*Informed imitation-Market-driven firmsstudytheirdi-
rect competitorsso they can emulatesuccessfulmoves
beforethecompetitiongets too farahead.Thisinvestiga-
tion requiresthoughtfuleffortsto understandwhy the
competitorsucceeded,as well as furtherprobesforprob-
lems and shortcomingsto identifyimprovements that
wouldbe welcomedby customers.Herethe emphasisis
moreon whatthecompetitor wasableto achievein terms
of superiorperformance, features,andso forth,andless
on understanding the capabilitiesof the competitorthat
resultedin theoutcome.
Synergistic informationdistribution.Firms often do not
know what they know. They may have good systems for
storing and locating "hard"routine accounting and sales
data, but otherwise managers have problems figuring out
where in the organizationa certain piece of informationis
known or assembling all the needed pieces in one place.
44 / Journalof Marketing,October1994
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This is especially true of competitorinformation,in which,
for example, manufacturingmay be awareof certainactivi-
ties throughcommon equipment suppliers, sales may hear
about initiatives from distributorsand collect rumors from
customers, and the engineering departmentmay have hired
recently from a competitor.
Market-drivenfirms do not sufferundulyfrom organiza-
tional chimneys, silos, or smokestacks,which restrictinfor-
mation flows to vertical movements within functions. In-
stead, informationis widely distributed,its value is mutual-
ly appreciated,and those functions with potentially syner-
gistic information know where else it could be used
beneficially.
Mutually informed interpretations. The simplifications
inherent in the mental models used by managersfacilitate
learning when they are based on undistortedinformation
about important relationships and are widely shared
throughout the organization (Senge 1990). These mental
models can impede learningwhen they are incomplete, un-
founded, or seriously distorted-by functioning below the
level of awareness,they are never examined.A market-driv-
en organizationavoids these pitfalls by using scenariosand
other devices (DeGeus 1988) to force managersto articu-
late, examine, and eventuallymodify theirmentalmodels of
how theirmarketswork, how competitorsand supplierswill
react,and the parametersof the responsecoefficients in their
marketingprograms.
Accessible memory.Market-driveninquiry,distribution,
and interpretationwill not have a lasting effect unless what
is learnedis lodged in the collective memory.Organizations
without practical mechanisms to remember what has
workedand why will have to repeattheir failuresand redis-
cover their success formulasover and over again. Collective
recall capabilities are most quickly eroded by turnover
throughtransfersand rapiddisbandingof teams. Data banks
that are inaccessible to the entire organizationcan also con-
tribute to amnesia. Here is where informationtechnology
can play an especially useful role.
Customer Linking as a Distinctive Capability
As buyer-sellerrelationshipscontinue their transformation,
a customer-linkingcapability-creating and managingclose
customer relationships-is becoming increasingly impor-
tant.At one time, standardpurchasingpracticeemphasized
arm's length adversarialbargainingwith suppliers,aimed at
achieving the lowest price for each transactionor contract.
Not surprisingly,suppliers focused on individual transac-
tions and gave little attentionto the quality of the interface
with the customer.They had little incentive to be open with
buyersor develop superioror dedicatedcapabilitiesbecause
they could easily lose the business to a competitor.The
buyer,in turn,was unlikely to be awareof a supplier'scosts
and capabilities.
Now customers, as well as major channel members7
such as Ikea and Wal-Mart,are seeking closer, more collab-
7Thecustomer-linkingcapabilityhas many featuresin common with the
channel bonding capability.Thus we expect the same skills, mechanisms,
and processes could be readily transferredbetween those relateddomains.
orative relationshipswith suppliersbased on a high level of
coordination, participation in joint programs, and close
communication links. They want to replace the adversarial
model, which assumes that advantages are gained through
cutting input costs, with a cooperative model that seeks ad-
vantagethroughtotal quality improvementand reducedtime
to market.This way of doing business suits their bettersup-
pliers, who confront intense competition that quickly nulli-
fies their product advantages and powerful channels that
control access to the market.
Despite recent emphasis on the establishment,mainte-
nance, and enhancementof collaborativerelationships,few
firms have mastered this capability and made it a competi-
tive advantage. Successful collaboration requires a high
level of purposefulcooperationaimed at maintaininga trad-
ing relationship over time (Frazier, Spekman, and O'Neal
1988; Spekman 1988). The activities to be managed start
with the coordination of inside-out and spanning capabili-
ties, althoughthese are not the means by which the relation-
ship is managed.Instead,new skills, abilities, and processes
must be masteredto achieve mutually satisfactorycollabo-
ration.These include the following.
Close communicationandjoint problemsolving. Suppli-
ers must be preparedto develop team-basedmechanismsfor
continuously exchanging information about needs, prob-
lems, and emerging requirementsand then taking action. In
a successful collaborativerelationship,joint problem solv-
ing displaces negotiations. Suppliers must also be prepared
to participatein the customer'sdevelopmentprocesses, even
before the productspecifications are established.
Communicationsoccur at many levels and across many
functions of the customer and supplier organizations, re-
quiring a high level of internalcoordinationand a new role
for the sales function.When the focus is on transactions,the
salesperson is pivotal and the emphasis is on persuadingthe
customer through features, price, terms, and the mainte-
nance of a presence. The sales function adopts a very differ-
ent-and possibly subordinate-role in a collaborativerela-
tionship. It is responsible for coordinatingother functions,
anticipating needs, demonstrating responsiveness, and
building credibility and trust.
Coordinatingactivities. In addition to the scheduling of
deliveries, new management processes are needed for (1)
joint productionplanning and scheduling, (2) management
of information system links so each knows the other's re-
quirementsand statusand orderscan be communicatedelec-
tronically,and (3) mutualcommitmentsto the improvement
of quality and reliability.
Manufacturer-reseller relationshas become a fertile area
for the development of collaborativemanagementcapabili-
ties, with the major grocery product firms taking the lead.
The objective of each partyused to be to transferas much of
their cost to the other as possible. This approachled to dys-
functional practices such as forwardbuying to take advan-
tage of manufacturer'spromotional offers, resulting in ex-
cessive warehousingexpenses and costly spikes in produc-
tion levels. Traditionally,contacts between partieswere lim-
ited to lower-level sales representativescalling on buyers
who emphasized prices, quantities, and deals. Increasingly,
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manufacturerslike Procter & Gamble and retailers like
KMartare assigning multifunctionalteams to deal with each
other at many levels, including harmonizingsystems, shar-
ing logistics and productmovement information,and joint-
ly planning for promotionalactivity and product changes.
The objectives of this collaborativeactivity are to cut total
system costs while helping retailersimprove sales.
Firms that have developed a distinctive capability for
managing collaborative relationships find they have more
integratedstrategies. The integrationbegins with a broad-
based agreementon which customers serve collaboratively
(Andersonand Narus 1991). No longer is this choice left to
the sales function, without regardto the impacton the man-
ufacturingand service functions.The cross-functionalcoor-
dination and informationsharingrequiredto work collabo-
ratively with customers enhances shared understandingof
the strategyand role of the differentfunctions.
Although collaborative relationships are becoming in-
creasinglyimportant,they are not appropriatefor every mar-
ket or customer. Some customers want nothing more than
the timely exchange of the productor service with minimum
hassle and a competitiveprice.And because of the effortand
resourcesrequiredto supporta tightly linked relationship,it
may not be possible to do this with more than a few critical
customers (Shapiro 1988a). Yet even when most relation-
ships are purely transactional,there are still possibilities for
gaining advantagesby nurturingsome elements of a linking
capability within the organization.This process begins by
analyzingwhich customersare more loyal or easier to retain
and proceeds by seeking ways to maintaincontinuity with
these customersthroughcustomized services or incentives.
Developing the Capabilities of
Market-DrivenOrganizations
Initiativesto enhance marketsensing and customer linking
capabilitiesare integralto broaderefforts to build a market-
driven organization.The overall objective is to demonstrate
a pervasive commitmentto a set of processes, beliefs, and
values, reflectingthe philosophythat all decisions startwith
the customer and are guided by a deep and shared under-
standingof the customer'sneeds and behaviorand competi-
tors' capabilitiesand intentions,for the purposeof realizing
superior performanceby satisfying customers better than
competitors.
Many firms have aspired to become marketdriven but
have failed to instill and sustainthis orientation.Often these
aspirantsunderestimatehow difficult a task it is to shift an
organization's focus from internal to external concerns.
They apparentlyassume that marginalchanges, a few man-
agementworkshops,and proclamationsof intentwill do the
job, when in fact a wide-rangingculturalshift is necessary.
To have any chance for success, change programswill have
to match the magnitudeof the culturalshift.
Preliminary insights into how to design change pro-
grams come from empirical researchon why some organi-
Market-Driven
Organizations/ 45
zations are more marketorientedthan others.8For example,
Jaworskiand Kohli (1993) confirm the long-standingbelief
that top managementcommitmentis essential. Strong affir-
mation of the notion that market-drivenorganizationshave
superior capabilities comes from three of their findings.
First, they found that formal and informalconnectednessof
functions facilitates the exchange of information whereas
interdepartmentalconflicts inhibit the communicationsthat
are necessary to effective marketsensing. This confirmsthe
desirabilityof managingthis capabilityas a set of organiza-
tion-spanning activities. Second, there was solid evidence
that centralization was antithetical to market orientation.
This mind-setappearsto flourishwhen thereis delegationof
decision making authorityand extensive participationin de-
cision making. Finally, the use of market-basedfactors such
as customer satisfactionfor evaluatingand rewardingman-
agers was the single most influentialdeterminantof market
orientation.
Furtherguidance into how to develop outside-in capa-
bilities in the context of a broaderchange programcomes
from parallelefforts to introduceTQM and applies method-
ologies such as business process reengineering(Davenport
1993). Although this backgroundis helpful, the key is to tai-
lor programsto the culture, environment,and competitive
position of the business. This requires the following steps:
(1) diagnosing current capabilities, (2) anticipatingfuture
needs for capabilities, (3) bottom-upredesign of the under-
lying process, (4) top-down direction, and (5) continuous
monitoringof progress.First,however,let us see what TQM
can teach us about change management.
Lessons from TQM
Like market orientation, TQM explicitly focuses on cus-
tomer satisfaction.A distillationof qualitystatementswould
yield a definitionof TQM as "a set of concepts and tools for
getting all employees focused on continuous improvement,
in the eyes of the customer-the next process as well as the
final consumer"(Schonberger 1990, 1992, p. 52). Surpris-
ingly, there have been few efforts in marketing9to take ad-
vantageof the tools, frameworks,and implementationmeth-
ods associated with TQM. This is not to imply thatTQM in-
variablyprevails.Regrettably,TQM faces many of the same
acceptance and implementationproblems as the marketing
concept. Recent studies have found that lack of results has
lead to the demise of as many as two-thirdsof TQM pro-
grams that are less than two years old. ArthurD. Little sur-
veyed 500 companies using TQM and found that only 36%
believed it was significantly boosting their competitiveness
(Business Week1992).
8Thereis mountingevidence showing thatthe importanceof a marketing
orientationvaries with the environmentalcontext (Doyle and Hooley 1992;
Jaworskiand Kohli 1993). The degree of introversion,the sources of un-
certainty in the market,and especially whether the dominantcoalition is
marketing,finance, or technology (Workman1993) will dictate what ac-
tions are needed, desirable,and feasible.
9Marketerswho have explored TQM have largely focused on the useful-
ness of TQM techniques for managing marketing activities (Locander
1989) or the role the marketingplays in supportingorganizationwidequal-
ity programs (Morgan and Piercy 1992). Of course, marketershave long
contributedto the measurementof quality from the customer'sperspective
(Parasuraman,Zeithaml, and Berry 1985).
461 Journalof Marketing,October1994
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Many explanationshave been advanced for the uneven
results of TQM programs:lack of sustained top manage-
ment commitment, impatience, and poor understandingof
the principles(Jacob 1993). Thereis a persistenttendencyto
believe thatmerely implementingtechniquessuch as bench-
marking will produce bottom-line results. Despite the
avowed interest in satisfying customers, the reality is that
most of the TQM effort is directedinternally(Kordupleski,
Rust, and Zahorick1993). Too often firms use standardver-
sions of TQM without adaptingit to theircircumstances.In-
deed, TQM does not seem to work in all circumstances.It
appearsto be best suited to relatively small, flat organiza-
tions with CEOs who are strong supportersand are actively
involved in adaptingit to their firm's culture.Total Quality
Managementalso suffers from having a strong functional
home. Originating in manufacturingand operations man-
agement,qualitypracticeshave evolved from statisticalpro-
cess control to quality assuranceto aspire to be organiza-
tionwide. In realityTQM is usually appliedwithin functions
or departments,but the problemstend to be much broaderin
scope (Kaplanand Murdock 1991).
At the heartof TQM is the concept of an organizationas
an interrelatedcollection of processes ratherthan an inter-
acting set of functional units. Although processes such as
orderfulfillmentor service delivery may reside in one func-
tion, the sequence of activities necessary to complete the
process usually crosses functional lines several times. The
objective of TQM is to optimize the flow of activities to re-
duce cycle time, prevent defects, and enable continuous
improvement.
Customeror competitiveorientation.All definitions of
TQM are anchoredin the concept of customer satisfaction;
the customeris the ultimatearbiterof quality(Garvin 1987).
Although marketerswelcome this perspective, because it
avoids the pitfalls of internally based definitions such as
conformance to specifications, the resulting metric can be
ambiguous.TQM commentatorsarejustly concernedabout
whether it means satisfying currentrequirementsor antici-
pating future expectations, which customers' expectations
are to be met, whether expectations should be met or ex-
ceeded, and the consequences of relying on customer per-
ceptions ratherthan objective facts.
The only explicit role of competitionis found in the em-
phasis on benchmarking.However,the message from TQM
advocatesis to look past direct competitorsand concentrate
on emulating the so-called best practices of organizations
that excel at a given business process or activity.Managers
are advised to go to Walt Disney Company for facilities
management,L.L. Bean for orderfulfillmentprocesses, and
Hewlett-Packardfor hints on how to improve new product
development processes. Furthermore,it appears that only
after a company has masteredother quality principles and
has an infrastructurein place is it worth trying to adoptbest
practices. Otherwise the effort is disruptive and
counterproductive.
Implementingchange. Here it is useful to compare and
contrastthe capabilities approachto strategy and TQM on
the matterof how to achieve change. Under the capabilities
approach,change is broadly conceived and flows from the
top down. TQM, by contrast,seeks incrementalchange from
the bottom up.
Two themes infuse the discussion of capabilities-based
change: the power of a coherent and shared vision and the
need for fundamentalrethinkingand radicalredesignof core
processes. A vision or strategicintent (Hamel and Prahalad
1989) is a sharedunderstandingof how the environmentwill
unfold and what the business intends to become in the fu-
ture. Its purposeis to focus the attentionof the organization
on a desiredleadershipposition-to ensurethatall functions
are contributingto the distinctivecapabilitiesneeded to win.
Effective visions, of course, are not solely top down. They
are best formed through collaborationbetween a business
team and a leader who is both an articulatorand a sponsor.
Nonetheless, strong leadershipis essential to mobilizing the
cross-functionalcapabilities to carry out the vision. Similar
top-down guidance is needed to restructurethe organization
aroundcapabilities. This means designing the organization
around the flow of value-adding activities rather than by
distinct functions.
TQM change programsemphasize individualempower-
ment and "managementby fact" to achieve continuous im-
provementof existing processes. The reason for implement-
ing change throughthe empowermentof employees is that
frontline sales, operations,and service personnelare poten-
tially in the best position to make better and faster opera-
tional decisions because of their direct involvement with
customers and activities. For empowermentto work, em-
ployees need (1) cross-training in their own and related
functions, (2) extensive skill-buildingto enable them to per-
form more broadly defined jobs, (3) informationthat helps
them monitor,improve, and control their performance,and
(4) recognition and rewards for improved performance
(Schoenberger1992). Above all, they need greaterauthority,
which means supervisorsand middle managersmust yield
some of their authority.
TQM also offers a rich libraryof tools that enable man-
agementby fact. Some of these tools are designed to support
the day-to-day activities of workers, managers,and teams.
Companies use them to run meetings, reach consensus, and
display the results of quality initiatives. Extensive use of
wall charts,for example, is characteristicof successful TQM
practitionerssuch as Milliken and Company, Xerox, and
Coming, Inc. Another set of tools is used to isolate the
causes of problems and solve problems:flow charts,scatter
diagrams, Pareto and fishbone charts, and statistical
progress charts. Finally, TQM has spawned tools such as
quality function deployment to aid the integrationof cus-
tomer requirementsinto the design process and measurethe
cost of quality.
Although TQM has a strong bottom-upemphasis, those
organizationsthat use the tools effectively and show a sus-
tained commitmentto empowermentalso have a strong top
management team willing to lead by example. Yet, even
when the strengths of TQM and the capabilities approach
are combined, they will not suffice to build a market-driven
organization.The associated concepts, methods, and frame-
works of both the TQM and capabilities approacheswork
best with repetitive and internally contained processes.
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However, the reach of market-drivenprocesses and their
embedded skills must extend beyond the bounds of the
organization.
Diagnosing the Current Capabilities
The assessment of the outside-in capabilities takes place in
a broadercontext of the adequacy of all capabilities. The
unit of analysis is the relevantprocess, and performanceis
gauged in terms of the desired outcome or result from the
process.
Each process must be mappedto reveal where and how
each of the activities is located. Mapping will also identify
disconnects at hand-off points (where information, ques-
tions, and decisions are transferredwithin and between pro-
cesses), delays and unnecessarywork, and sequences of ac-
tivities thatcan be done in parallel.An importantconsidera-
tion is the locus of responsibilityfor each of the activities in
the process, with a view to revealing dispersed ownership
and lack of focus.
Mapping is difficult, because the relevant process sel-
dom appearsas a neat packageof distinctand sequentialac-
tivities. For example, market-sensingprocesses are likely to
be fragmented,obscured by the dispersal of critical activi-
ties throughoutthe organization,and woven into other pro-
cesses. It may be necessary to have differentclasses of mar-
ket-sensing processes that vary in complexity and frequen-
cy. Processes will differ depending on whether the focus is
on using routinetrackinginformation,undertakingcontinu-
ing inquiries to support other ongoing processes such as
productideation,or makingnonrecurringinquiriesinto new
opportunitiesor threats.
A useful next step is to benchmarkthe capabilitiesof di-
rect competitors, anticipatedcompetitors, and the best-of-
breed industriesfacing comparablechallenges. This should
provide realistic targetsfor improvementand yield sugges-
tions for how to proceed. More important,the widespread
recognition of a competitive gap in these capabilities that
can hurt long-run performancewill help mobilize support
and ensure that motivationdoes not flag.
Anticipating Future Needs for Capabilities
The diagnostic stage will reveal a portfolio of capabilities;
some will be distinctive sources of competitive advantage,
others will be done poorly,but most will be done at a parity
level that neitherhindersnor enhances the competitiveposi-
tion. Some will urgently demand dramatic action, others
will be candidatesfor continuous improvementefforts, and
manycan safely be sustainedat paritywith competition.The
choice of where to allocate resourceswill be dictatedby the
market,the centrality of the capability to the strategy,and
the opportunitycost of not taking remedialaction.
The structure,texture, and dynamism of the expected
marketwill strongly influence whetherthe business should
invest in building distinctive marketsensing and customer
linking capabilities. Fragmentaryevidence suggests that
when competition is limited, marketpreferencesare stable,
technology is changingfast, and the exchange relationshipis
purely transactional, heavy investments in improvement
Market-Driven
Organizations/ 47
might not be justified (Kohli and Jaworski 1990).10
A compelling argumentcan be made for investing in the
market-driven capabilities even when the environment
seems inauspicious.It is precisely these seemingly staticcir-
cumstances,in which new or establishedrivalscan upset the
competitive balance, customers can begin to wield their la-
tent power, and mobility barriersmay be lowered, that war-
rant new capabilities. Ironically, the failure to anticipate a
change in competitive forces or customer requirementsre-
sults from a deficient market-sensingcapability or inade-
quate links to key customers. As customers narrow down
their roster of suppliers,it may be too late for many suppli-
ers to shift from an adversarialto a partnershipstancebefore
the account is lost.
Strategiesthatemphasizecreatingcustomervalue all de-
pend on building distinctive market-sensingand customer-
linking capabilitiesand using these capabilitiesto guide the
internal processes. Treacy and Wiersema (1993) make the
case that superior strategies are based on delivering cus-
tomer value in one of three distinct ways:
1. Operationalexcellence, throughprice and convenience
leadership,requiresbusinessprocessesthatminimize
overheadand internaltransactioncosts and manage
close linksto customersandchannelpartners;
2. Customerintimacystrategiesemphasizethe abilityto
continuously tailorproductsandservicesto increasing-
ly finecustomerdefinitions;a highlydevelopedmarket
sensingcapabilityis essentialso thatshiftingrequire-
mentscanbe identifiedas earlyas possible;and
3. Productleadershipis attainedwitha continuous stream
of innovativeproductsandservices.Hereagain,a mar-
ket-sensingcapability-recognizingemergingneeds,
rapidlyassessingcustomerresponse,and designing
rapidmarketentrystrategies-is a key contributor to
the successof thisstrategy.
Designing the Change Program
Once a candidateprocess has been designated as the basis
for a potentialdistinctive capability,because of its strategic
centrality,the presence of a committedcapable sponsor,and
a favorablehistoryof change, the first questionis whetherto
adopt a radicalreengineeringapproachto change (Hammer
and Champy 1993) or a more gradualcontinuousimprove-
ment approachbased on TQM. The choice depends on the
magnitudeof the needed change, the feasibility of it, and the
resources requiredto accomplish it (Davenport 1993). Be-
cause most firms are capital constrained,this may limit the
scope of reengineering. However, because the capabilities
and TQM approachesshare certain principles and adopt a
process perspective, it is possible to offer some general
propositions on managing change. These propositions are
consistent with recent evidence (Jaworskiand Kohli 1993)
that market-drivenbehaviors require steadfasttop manage-
ment commitmentand are fostered throughcross-functional
activities, shared objectives, externally oriented incentives,
l'This interpretationmust be made cautiously, however, because it is
based on the moderatingeffect of the environmenton the relationshipof
market orientation to business profitability,which finds that coefficients
may be smallerin some settings, althoughalways positive (Slaterand Narv-
er 1992).
48 / Journalof Marketing,October1994
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All use subject to JSTOR Terms and Conditions
and the decentralizationof decision making to a point as
close to the customer as possible. Achieving these ends re-
quires a combinationof bottom-upredesign and top-down
direction.
Bottom-upredesign.The redesigneffort usually requires
forming teams that are responsiblefor the process outcome
and appointingan ownerof the process.At the same time the
team is given more accountability,senior managers must
loosen their control by eliminating tight specifications of
proceduresand forgoing detailed reports.This action makes
it clear that the team is responsiblefor continuousimprove-
ment in satisfying external and internal clients. These
changes must be supportedwith investmentsin distributed
informationsystems, incentives for improvement,training
so that membersof the team know each other's role and can
understandand use the informationthat is available,and fo-
rums for discussing progress. These bottom-up initiatives
will not succeed on their own, because there still must be
links between processes (e.g., who is going to be responsi-
ble for pricingof orders)and boundariesplaced on behavior
so that energy is not diffused. Furthermore,not every pro-
cess requiresa dedicatedteam-that would spreadkey per-
sonnel too thinly.Thus, some processes mustbe managedby
task forces that are formed to solve particularperformance
problems and then disbanded.The result is that the organi-
zation structurebecomes flatter and more flexible, but a
clear hierarchyremains.What, then, must happenat the top
of the hierarchyto guide the bottom-upchanges?
Top-downdirection. For an organizationto enhance its
marketorientationand thus to develop superiormarketsens-
ing and customerlinking capabilities,top managementmust
make an unequivocalcommitmentto puttingcustomersfirst.
This commitment is mainly signaled by deeds and time
spent.Wordshave theirplace, but withoutthe deeds to back
them up, the rest of the organizationwould soon learn the
real prioritiesand behave accordingly.
Senior managementleadershipis needed to reshapethe
culture,throughsuch actions as proposinga challenging vi-
sion of the future or setting a major performanceimprove-
ment target like cutting time to marketin half. Furtherin-
fluence can be exercised throughthe strategydevelopment
process-to ensure broad participation,understanding,and
acceptance of the chosen direction.A rigorous strategyre-
view focusing on pivotal issues and critical assumptions
aboutthe ability of the business to compete can furthersup-
port the process.
The enabling role of informationtechnology.A process
perspectiveon managementproblems,leading to the decen-
tralizationof decisions, is not new. Skeptics contend that it
tends to prevail during economic downturns.What is new,
however, is the potential of informationtechnology (IT) to
enable organizationsto do things they could not do before
and thus develop new capabilitiesand skills.
An integratedIT approachhas many elements: shared
databases, high-speed communication networks, decision-
supportsystems, automaticproductidentificationand track-
ing, and large-scalecomputing.These elements can be com-
bined to fundamentallytransformboth the market sensing
and customer linking capabilities:
*Large-scale marketresearchdatabasesfacilitatethe inte-
grationand coordinationof dispersedmarketing,sales,
andservicegroupsandenhancelearningby disseminat-
ing informationrapidlyand holdingit readyin central
memoriesforeasy access(Cespedes1993).
?Closercustomerandchannellinksarenow possiblebe-
cause informationnetworkshave dramatically reduced
the cost of handlingwhatwere formerlypapertransac-
tionsbetweenparties.Thispermitsmuchcloseranderror-
freeintegration of customerandsupplierfunctions.
*Groceryproductfirmsarenow ableto integratescanner
dataon consumerbuyingbehaviorwiththepurchasepat-
ternsandlifestyleprofilesof shoppersin eachof 30,000
stores.Withthisdatatheycantailormarketing programs
for nationalaccountsto clustersof storesor individual
storescateringto theneedsof customersandthedifferent
merchandising philosophiesof theretailers.
?Marketing andsales productivity
systemspermitlinking
togethermarketing databaseswiththedistributionsystem
as well as directmarketing,
telemarketing,andothersales
systems.These integratedsystemspermitcarefulmoni-
toringof all sales anddistribution processes,plus track
the lifetimevalueof customersto guideresourcealloca-
tiondecisions.
These examples demonstratewhat leading firmsare doing to
reconfiguretheir marketingprocesses and hint at the possi-
bilities for the.future.Theircompetitorswill eventuallyhave
to match or exceed these capabilities to meet their cus-
tomers' expectations of minimum acceptable performance.
In the meantime the innovatorhas gained a first-moverad-
vantage and a platformfrom which to apply the latest in IT
advances to offer new services.
Monitoring progress. Within TQM circles there is an
adage, "If you don't measureit, you can't improve it." The
final step in the improvementprogramis to decide which
key performanceindicators(KPIs) to monitor.For each KPI
there are periodic measurementsand a series of time-based
targets to reach, so problems and shortfalls can be quickly
recognized and corrective action taken. For example, Col-
gate-Palmolive has developed a series of measures to align
the entire company to tradesatisfaction.In additionto rela-
tive tradesatisfaction,they routinelymeasurethe numberof
orders delivered on time, numberof orders delivered com-
plete, accuracy of matching of invoices and deliveries, and
shelf movement.They believe these reflect what the grocery
trade is looking for and will reveal to the organization
whether sufficient progressis being made.
Summary and Conclusions
It is almost an article of faith within marketingthat superior
business performanceis the result of superiorskills in un-
derstandingand satisfying customers. This propositionhas
been partially validated by a growing body of research on
the impact of a marketorientationon business performance.
This work has helped give a fuller pictureof the attributesof
market-drivenorganizations,highlighting the roles of cul-
ture, information utilization, and interfunctionalcoordina-
tion. These insights are not sufficient for managers,because
they do not reveal how the superiorskills were developed.
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All we see is the results of the organizationaltransforma-
tion. Now managersseek guidance on how to enhance the
marketorientationof their organization.
The emerging capabilities approachto strategyoffers a
valuable new perspective on how to achieve and sustain a
marketorientation.This approachseeks the sources of de-
fensible competitivepositions in the distinctive,difficult-to-
imitatecapabilitiesthe organizationhas developed.The shift
in emphasis to capabilitiesdoes not mean that strategicpo-
sitioning is any less important(Porter 1991). On the con-
trary,the choice of which capabilitiesto nurtureand which
investment commitments to make must be guided by a
sharedunderstandingof the industrystructure,the needs of
the target customer segments, the positional advantages
being sought, and the trendsin the environment.
Two capabilities are especially important in bringing
these external realities to the attentionof the organization.
One is the marketsensing capability,which determineshow
well the organization is equipped to continuously sense
changes in its marketand to anticipatethe responses to mar-
keting actions. The second is a customer-linkingcapability,
which comprises the skills, abilities, and processes needed
to achieve collaborativecustomerrelationshipsso individu-
al customer needs are quickly apparentto all functions and
well-definedproceduresare in place for respondingto them.
Guidanceon the design of effective programsto enhance
these capabilities comes from the capabilities approachto
strategy and TQM. Both these approachesshare a concep-
tion of an organizationas an interrelatedcollection of pro-
cesses, and each has an associated set of methods and pro-
grams for seeking improvement.By combining the two ap-
proacheswith priorempiricalwork on why some organiza-
tions are more market-orientedthanothers,a comprehensive
change programwas proposedwith the following elements:
*Diagnosisof currentcapabilities,using mappingand
benchmarking methodologies,
*Anticipation of futureneedsforcapabilities
in lightof the
strategyforcreatingcustomervalue,
*Bottom-up redesign,basedon the formationof teamsre-
sponsibleforcontinuous improvement orradicalredesign
of underlying processes,
*Top-down directionfromseniormanagers,who demon-
stratea clear, continuingcommitmentto puttingcus-
tomersfirst,
*Useof information
technologyto enabletheorganization
to do thingsit couldnotdo before,and
*Monitoring of progresstowardimprovement targets.
This change programmust be undertakenin conjunction
with other actions aimed at enhancinga marketorientation.
Indeed, the market sensing, customer linking, and channel
bonding capabilitiescannot be nurturedor productivelyuti-
lized withoutconcurrentattentionto the values, beliefs, and
behaviorsof the membersof the organizationand being sup-
ported by changes in the organization structure, system,
control, incentives, and decision processes.
An Agenda for Research
Many researchtopics are suggested by the need to improve
understandingof the implications of the process versus
Market-Driven
Organizations/ 49
functionalperspectiveson marketingdecisions suggestedby
the capabilities approach. There also remains a pressing
need for researchersto examine the attributesof change pro-
grams that have been and could be effective in enhancing a
marketorientation.
Identifying distinctive capabilities. We have proposed
that most businesses have only a few superiorcapabilities
thatenable them to outperformthe competition.As yet little
is known abouthow to identify these distinctivecapabilities.
One useful avenue for researchwould be to study the links
between positional advantages(such as superiororder pro-
cessing speed and cost as judged by customers)and a corre-
sponding capability embedded in the order fulfillment pro-
cess, for example.
The sustainabilityof distinctive capabilities. One of the
defining features of distinctive capabilities is that competi-
tors find them difficult to understandand imitate. Theory
would suggest that is especially true with complex, multi-
stage processes, in which there is a large amount of tacit
knowledge widely dispersedthroughoutthe organization.
Diagnosing the market-sensingcapability. Several mar-
ket-sensing capability issues demand research attention:
Can replicable maps of the marketlearningprocess be cre-
ated, and what areas for improvementwould be revealed?
What is the role of the organizationalculture in supporting
the capability? Do market-drivenorganizationsscan more
widely and tap more diverse sources of information?How
do the mental models that managers hold about the struc-
tures and behaviorof their marketsdiffer?Do stronglyheld
mental models increase the risk of myopia and insensitivity
to weak signals from unexpectedsources?Whatis the effect
of advancesin informationtechnology on the dissemination
of marketinformationand the enhancementof organization-
al memory?
Diagnosing the market-linkingcapability. The notion
that close relationships are the outcome of a process that
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